Goblins were in fact, for me, a turning point on this concept. I had a player who wanted to be a goblin, and I forgot about this fact up to the point that the party got a quest to kill goblins. As soon as I was announcing the quest I realized it would be a problem, though I didn't have anything else ready so I went with it. And it was! The players immediately questioned why the mayor was paying mercenaries to kill goblins, and then further questioned his justifications, at which point I realized it would be a better story if the goblins were a scapegoat and not an actual villain.
This turned into a terse interrogation where the mayor threatened to put them in jail once their questions got pointed enough that he would have to either field accusations or lie; they then went CSI on the situation and drilled through his political cabinet to get answers. I had to improv pretty much all of it and I don't remember the actual ending (I know they sided with the goblins and the mayor was guilty), but this helped me realize that the Gary Gygax writing style of "certain races are just BAD and that's why they hang out in dungeons" was very short-sighted.
D&D writing, by and large, encourages a lack of questions. The surface runs deep. "Go into a cave and chop up goblins." Why are we doing this? "Goblins are bad." All goblins? "Yes."
I think the question of "why are there players comfortable siding with fascist factions and wondering why they're called 'lawful evil'" is pretty easily answered with... because D&D itself is inherently kind of fascist. And it's the most insidious kind of fascist, too- its villains are fascists, so how could you point fingers at the book?
Fire Giants are dwarf slavers. Drow are a megalomaniacal theocracy who hate men. Orcs are violent tribes of marauding killers. Illithids want to destroy all life and keep an entire civilization to scrub their floors. But these narratives still push the idea that "evil" is a racial trait. The players are not only justified in their campaign to destroy these cultures, they're encouraged to do it.
They let the cat out of the bag by making these playable races; because now, they're not cut-and-dry villanous societies. They're people. There are Drow accountants whose lives are about balancing taxes, not worshipping Lolth. There are Yuan-Ti who don't sacrifice babies on altars, and much prefer playing the lute or sewing blankets. Yet we're still expected to read "Chaotic Evil" under the Monster Manual entry for a bugbear and take it seriously.
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